Kenya Nearing The End Of Its Easing Cycle

We forecast one more 50 basis points (bps) rate cut to 8.50% by end-2018 as the Central Bank of Kenya (CBK) takes advantage of low inflation and a stable currency to enact modest further monetary loosening.

While growth is recovering, policymakers are likely concerned about still-weak credit growth.

However, we expect after one final cut, we will likely see an end to the multiquarter easing cycle, with rising inflation in the final months of 2018 precluding further rate cuts.

Forecast Changes

We have revised our forecast for Kenya's end-2018 central bank rate to 8.50% from 9.00% previously, which we expect will be held in place until end-2019.

One Further Cut In 2018

Kenya - Central Bank Rate, %

Source: CBK, Fitch Solutions

The CBK will likely undertake one more rate cut in 2018, following the decision in July to cut by 50bps. While we had previously forecasted one more rate cut, we had anticipated it to be enacted later on in the year, and this has encouraged us to revise our forecasts. After a total of 100bps worth of cuts in 2018 so far, we believe that policymakers see some further scope for easing. Inflation has remained in the lower bound of the bank's 5.0 +-2.5 percentage points target range since November 2017, owing to stronger harvests across East Africa which have boosted food supply, and subdued headline inflation. The Kenyan shilling has also remained broadly stable in the past year, escaping relatively unscathed from the recent bout of market 'risk off' prompted by rising concerns over the Turkish economy. We expect that the central bank will likely take advantage of these favourable conditions and enact further easing.

Inflation Subdued But On The Rise

Kenya - Consumer Price Inflation, % y-o-y

Source: KNBS, Fitch Solutions

Recent central bank statements suggest policymakers are eager to keep monetary policy supportive after political turmoil and the impact of the rate cap has constrained growth in recent quarters. Real GDP growth came in at 5.7% y-o-y in Q118, reflecting improved consumer and business confidence after a turbulent post-election period in H217. However, the cap on bank lending rates imposed in August 2016 has seen commercial banks continue to hold back from extending credit to riskier borrowers. In the monetary policy statement released after the July 30 rate decision, policymakers noted that 'economic output was below its potential level' and that rate changes while the interest rate cap was still in effect 'had a smaller and slower impact on... credit and economic growth'. As such, we believe that concerns about growth will be a further incentive for one more rate cut.

We expect this to be the last rate cut in the current easing cycle, given that inflation is likely to rise toward end-2018. This is due to increases in fuel prices, driven higher by rising Brent crude prices. Moreover, the Kenyan Treasury introduced VAT on kerosene which went into effect in July but is currently under suspension by the High Court - if it is reinstated this would drive further upward pressure. As such, we forecast average inflation of 4.7% in 2018 compared to a year-to-date average of 4.3%, with average inflation likely to rise to an average of 6.0% in 2019 as weather conditions and food prices normalise after the bumper harvest in 2018. Coupled with gradually stronger credit growth, this will preclude further easing in 2019.